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“Kee” Points with Jim Kee, Ph.D.

The Economy

Politics

The Stock Market

Global

The Economy

Most analysts and strategists don’t see a US recession this year, but perhaps in 2019 or 2020 (e.g. John Mauldin’s own summary of his recent annual Strategic Investment Conference). Current data supports this (for example last week’s industrial production numbers for February, which were pretty strong). Sentiment readings, whether measured across individuals, small businesses, or CEOs, remain at or near all-time highs. Recessions can’t really be forecasted very easily because they are brought about primarily by unpredictable macroeconomic shocks. That’s what the data suggest. The best you can do is measure the economy real-time to get a sense of what impact prior shocks are having, and that’s what various Federal Reserve “nowcasting models” are intended to do. Those models are showing lower estimates for GDP in the first quarter, with the Atlanta Fed’s estimate now standing at 1.8%, and the New York Fed’s estimate at 2.8%. These estimates have generally fallen throughout the quarter, which is consistent with the notion – backed by history – that the first quarter tends to be the lowest. History also suggests that growth should bounce back stronger in the latter quarters.

Politics

Last week President Trump appointed Larry Kudlow, self-designated “supply-sider,” as Director of the National Economic Council (replacing Gary Cohn). I put “supply-side” in quotes because it is one of those vaguely defined terms that means different things to different people. Neither proponents nor opponents of supply-side economics really understand its conceptual underpinnings (I’ve discussed this previously so won’t go into that again here). The credentialed, PhD economists who articulated supply-side tenets in peer-reviewed research in the late 1970s and early 1980s included Norman Ture (who also worked with the Kennedy administration), Robert Mundell (1998 Nobel Laureate), and Arthur Laffer (Laffer Associates), Victor Canto (La Jolla Economics), and David Ranson (HCWE). Others were journalists or fellow-travelers influenced by this group, and I would put Larry Kudlow in that camp. Kudlow is an outspoken opponent of President Trump’s protectionist (trade restrictions) agenda, so many have spun this as indicative of Trump wanting all viewpoints. That could be, but another reason could be that Trump is concerned that growth numbers will be coming in below his 3%+ target, and Kudlow talks a strong growth game.

The Stock Market

The current bull market in stocks is the second largest and second longest in the post-World War II era if you measure it from the March 9, 2009 bottom (the longest and largest occurred in the 1990s). That data was in a chart from Matt Toply’s blog, which also mentioned that stocks tend to underperform in the first part of mid-term election years (like this one), only to bounce back in the final quarter. That caught my eye because our own research on stocks during presidential election years going back to 1928 showed a distinct pattern: stocks sell off in October-which is usually a positive month-prior to November elections, and then bounce back in November and December. You could easily argue that 2016 was no normal election year, and that prior patterns would probably not be relevant. But stocks in 2016 behaved exactly how they had historically. They sold off in October and bounced back in November and December. I know there is a lot going on today, from concerns over Fed rate hikes and rising interest rates to very strong company earnings reports. But I find the market’s tracking of historical election patterns pretty compelling, and if it continues through 2018 that would lead to stocks finishing the year on a positive, albeit below-average note.

Global

Looking globally, trade war concerns continue to dominate the global headlines, with the European Union expressing sympathy with the US over China’s trade agreement violations. However, the EU has also threatened retaliatory measures if Trump’s rhetoric of restricting or imposing tariffs upon EU auto imports becomes reality. On this topic I continue to feel that all parties are aware of the negative effects of a true trade war (even Trump appears sensitive to the negative stock market effects), so I expect and hope to see trade renegotiations favored over escalating retaliations. Also in the headlines, free-traders continue to mention the detrimental but often overstated impact of the Smoot-Hawley tariff (Tariff Act of 1930) on the US stock market and economy. That’s probably due to the influence of one of the supply-side journalists I alluded to in the first paragraph, Jude Wanniski. Wanniski was an associate editor of the Wall Street Journal in the 1970s and had chronicled how the stock market crashed in 1929 after the Senate coalition to block the Smoot Hawley tariff from passing fell apart (also published in his 1978 book, The Way the World Works). Thirty-five nations opposed the legislation and threatened retaliation, which they did as a trade war ensued. Between 1929 and 1932 imports fell by two thirds and exports fell even more (from Charles Kadlec’s updated account in his unfortunately titled 1999 book, Dow 100,000). But there were many, many other things going on as well, which is why – as important as it was – I mention that those relying solely on Smoot Hawley to explain the downturn and depression ascribe too much importance to it.